Teaching Notes · Economic Development and Growth

Who Is Poor, and How Do We Solve It?

Every discussion of poverty starts with a poverty line, some level of income that separates the poor from the non poor. The trouble is that there is more than one reasonable way to draw that line, and the choice matters enormously for how big the problem looks and what kind of policy response makes sense.

Relative poverty and absolute poverty

Relative poverty compares a person's income to the average income in their own country. Anyone earning below that average is relatively poor, anyone above it is relatively non poor. Because average income varies enormously from country to country, the relative poverty line is different everywhere it is drawn. A household earning an income that would be comfortable in a low income country could still count as relatively poor in a wealthy one, simply because the local benchmark is so much higher.

Absolute poverty works differently. It is anchored to the minimum income needed to meet basic subsistence needs, to stay alive, not to live comfortably. For comparison across countries, the World Bank maintains an international poverty line expressed in dollars a day, adjusted for differences in purchasing power between countries. That line has been revised upward repeatedly as better cost of living data has become available: from roughly a dollar a day in the 1990s, to $1.25, to $1.90, to $2.15, and most recently to $3.00 a day in 2021 purchasing power parity terms, a change the World Bank announced in 2025. The dollar figure itself is not the important part; what it is meant to capture, consistently, is the income needed to meet the most basic needs for survival, however that threshold gets recalibrated over time.

Using a country specific example: the World Bank's most recent nationally reported figure for Egypt put the national poverty rate at 29.7 percent in 2019, measured against Egypt's own national poverty line rather than the international one, and that figure predates the economic disruption of the COVID-19 pandemic. It is a useful illustration of just how large a share of a population can sit below a poverty line even in a middle income, rapidly growing economy, and a reminder that GDP growth figures, the subject of the first piece in this series, do not automatically tell you what is happening to the poorest part of a population.

At the global level, the picture behind the $3.00 a day line is roughly as follows: something on the order of 808 to 831 million people worldwide live below it, a little under ten percent of the world's population. That poverty is not spread evenly. Sub Saharan Africa alone is expected to be home to more than three quarters of the world's extreme poor by 2025, with the remainder concentrated heavily in fragile and conflict affected states, a pattern that reflects how closely absolute poverty tracks weak institutions, conflict, and limited state capacity rather than being simply a matter of a country's average income.

The poverty gap

Knowing what share of a population is poor is only half the picture. A country where the poor fall just barely below the poverty line faces a very different problem from one where the poor are far below it, even if the headcount percentage is identical. The poverty gap captures this second dimension: it is the total amount of additional income that would be needed to bring every poor person exactly up to the poverty line. Two countries can report the same percentage of their population living below the subsistence level and still have very different poverty gaps, because the depth of poverty, not just its breadth, differs between them. Economists sometimes distinguish further within this group: those just below the line are in absolute poverty, those considerably further below are in acute poverty, and those with next to no income at all are at the starvation level.

These ideas have standard formal measures. The headcount index is simply the number of people counted as poor divided by the total population, giving the incidence, or prevalence, of poverty. The total poverty gap adds up, across every poor person, the difference between the poverty line and that person's actual income, giving the total resource shortfall, measured in money, that poverty represents for the country as a whole. Dividing that total poverty gap by the whole population, not just the poor, gives the average poverty gap, which can be read as the cost of eliminating poverty entirely, spread evenly across everyone in the economy. Calculating the poverty gap measures, rather than the headcount alone, is what tells policymakers how far below the line people actually are, not just how many of them there are, and it is this depth measure, not the headcount, that determines how much money would actually be needed to close the gap.

Beyond income: the Multidimensional Poverty Index

Because poverty is rarely only about money, researchers working with the United Nations Development Programme and the University of Oxford developed the Multidimensional Poverty Index, which identifies a household as poor using a dual cutoff method: first checking whether the household falls below a minimum threshold within each of several dimensions of wellbeing, broadly analogous to falling below an income poverty line, and then checking whether a household is deprived across enough of those dimensions at once to be counted as multidimensionally poor, rather than merely facing one isolated disadvantage. The index covers three equally weighted dimensions, health, education, and standard of living, each built from specific household level indicators: health is measured by whether any child in the household has died and whether any member is malnourished; education by whether no household member has completed five years of schooling and whether any school aged child is out of school; and standard of living by six separate deprivations, lack of electricity, unsafe drinking water, inadequate sanitation, poor quality flooring, unimproved cooking fuel, and owning fewer than two of a small set of basic assets such as a radio, television, or bicycle.

Building the index up from these household level measures, rather than starting from already aggregated national statistics, lets it capture something that a simple income based poverty rate cannot: the compounding, interactive harm of experiencing several deprivations at the same time. A household that is behind on housing quality but has a well educated member may still avoid being classified as multidimensionally poor, since a strong capability in one area can partly substitute for a weaker one, up to a point, before deprivations start to reinforce each other instead.

Financing and closing the gap

Addressing poverty at a national scale generally follows a sequence: establish what share of the population is poor, estimate the poverty gap, identify financial sources to close it, and decide how to channel those funds to the people who need them. Financing for the poverty gap typically comes from three broad sources: the government's own budget; international finance, including aid, grants, and the support of international institutions; and civil society, spanning businesses, non governmental organizations, local institutions, and dedicated bodies such as a national social fund for development. Once the financing is in place, three broad approaches describe how that money actually gets used.

• The welfare approach. Direct cash payments to bring people up to subsistence level. It is the most appropriate approach for people who cannot work, the elderly or the sick, but applied broadly to the working age population it risks reducing the incentive to work, which can end up lowering overall productivity.
• The human capital approach. Investing in people's skills through education, training, and healthcare, typically starting with basic literacy, so that people become able to work productively rather than simply being supported.
• The economic approach. Creating job opportunities directly, or providing small loans so people can become self employed in small scale activities, moving people from dependency into productive economic participation.

In practice, none of these three works well in isolation, and implementing any of them requires institutions capable of actually reaching poor households, along with the policies and legal frameworks needed to make sure the resources are used efficiently once they arrive. Standard policy discussions of inequality and poverty together also point to a narrower set of levers governments can pull directly: changing relative factor prices so that labor, which the poor have more of than capital, is not systematically undervalued; progressive redistribution of asset ownership, land reform being the classic example; progressive taxation, where tax rates rise with income; and transfer payments or the public provision of goods and services such as healthcare and basic education, which effectively redistribute resources without requiring a direct cash transfer.

Sources: Chapter 5, “Poverty, Inequality, and Development,” and the supplementary lecture on comparative development, following M. P. Todaro and S. C. Smith, Economic Development (Pearson); World Bank, international poverty line update (2025); World Bank, Arab Republic of Egypt Poverty and Equity Brief (October 2024); and the Alkire-Foster methodology behind the UNDP and Oxford Poverty and Human Development Initiative's Multidimensional Poverty Index.